The government's policy making has been clearly focused on long-term structural benefits, which is likely to be positive for Indian companies, even if sometimes disruptive in the near term.

The equity market has reacted positively to the Budget, with a rally driven by relief over lack of change in long-term capital gains tax on equities. We believe consumer and cement sectors may benefit from the rural focus and the thrust on infrastructure development may benefit select defence and capital goods stocks. Banks may profit from digitisation, softer rates and generally from pick-up in growth.

"An increase in corporate earnings volatility would not be surprising as companies attempt to tide over the impact of demonetisation. The impact of the cash ban is likely to be endured by consumer discretionary sectors over the next few months"

Despite moderate declines in earnings estimates recently due to the expected impact of the note ban on consumption demand, consensus estimates forecast a growth rate in the high-teens for 2017/18, which we consider reasonable given the low base. That said, an increase in corporate earnings volatility would not be surprising as companies attempt to tide over the impact of demonetisation. The impact of the cash ban is likely to be endured by consumer discretionary sectors over the next few months, even as the magnitude of the impact fades gradually. However, margins look quite low compared with their long-term averages, and we believe there is a structural opportunity for improvement. Meanwhile, export-oriented sectors such as information technology and pharmaceuticals may benefit from a strengthening US dollar.

We continue to find numerous opportunities that meet our quality and sustainability criteria in the Indian equity market, in particular in domestically-oriented sectors such as financials (favouring private sector retail-oriented banks), industrials and consumer discretionary, which should benefit from the acceleration in economic growth in the medium term. We also maintain our view that equity funds with core exposure to large caps and prudent risk-taking in the small/mid cap space may be well-positioned to capture the opportunities presented by the current valuations and expected earnings growth. ~